FATCA: The end of financial privacy

In light of multiple revelations on the extent of NSA spying upon U.S. citizens, Americans are increasingly weary of government infringement on privacy rights. First, it was revealed that the NSA was mining data from internet companies with a program called PRISM. Later we learned this information was used for much more than just hunting terrorists, with the DEA and IRS getting tips from the NSA and using information collected by the dragnet in the course of ordinary investigations. But as shocking as these and other revelations have been, perhaps the most breathtakingly invasive program remains largely unknown among the general public.

The Foreign Account Tax Compliance Act (FATCA) grants the IRS power to do with financial information what the NSA has done with communications data. Similar to how the NSA justifies their invasion of privacy on the need to prevent acts of terrorism, FATCA cites reducing tax evasion as reason to treat any American living, banking or investing overseas as guilty until proven innocent and undeserving of basic constitutional protections.

A Costly and Ill-Conceived Tax Grab

Passed in 2010 as part of the HIRE (Hiring Incentives to Restore Employment) Act, FATCA conscripts foreign financial institutions as agents of the IRS, demanding that they monitor and report at their own expense on U.S. clients. Should they refuse or otherwise fail to convince the IRS that they are doing a sufficient job at spying on American citizens, they will be slapped with a 30 percent withholding tax on all U.S. source payments. Anyone considered a U.S. taxpayer is also required to reveal all of their foreign-held assets to the IRS, with stiff penalties for even the slightest oversight or delay.

The law is ostensibly aimed at curbing tax evasion, but in practice it will do little to accomplish that goal. Rather than target individuals or institutions at risk for engaging in tax evasion or unlawful behavior, FATCA hits every financial institution in the world with unreasonably costly burdens that have caused many to simply refuse to accept American clients.

Likewise fed up with excessive paperwork and invasive rules, record numbers of Americans are renouncing their citizenship. To make matters worse, institutions that seek to avoid FATCA’s high costs are also taking their investments out of the U.S. economy. With trillions invested in the U.S. from foreign sources each year, a loss of a mere fraction of this could spark another recession. It’s thus easy to see why the Joint Committee on Taxation estimated the law would raise a paltry $800 million per year, which is less than 1 percent of the $100 billion the law’s backers dubiously claim is lost to tax evasion each year.

The End of Financial Privacy

FATCA’s counterproductive economic burdens and invasive requirements would be bad enough, but the IRS has pursued an implementation strategy that threatens to vastly expand the dangers posed to individual privacy rights. Because the law was hastily conceived and passed without a single hearing or debate, it contains major flaws. These include the fact that FATCA’s requirements often conflict with domestic privacy laws. The logistics of monitoring and assessing every financial institution in the world, furthermore, quickly proved overwhelming for the bureaucracy.

Faced with these obstacles, regulators could have kicked the issue back to Congress to reconsider. But rather than let an opportunity pass to vastly expand their powers, the Treasury Department has sought – unilaterally and without proper congressional authority – to negotiate with foreign governments so that they would first collect information on American clients and then pass it on to the IRS. While perhaps solving some of the logistical problems with the law, this approach has opened up even more avenues for abuse. Treasury’s pursuit of unratified and unconstitutional “intergovernmental agreements” adds another set of government hands – this time completely unelected by and unaccountable to the U.S. public – through which the personal financial information of millions of American citizens would flow.